Regional REIT — Confirming outlook

Regional REIT (LSE: RGL)

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GBP1.26

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Market capitalisation

GBP205m

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Research: Real Estate

Regional REIT — Confirming outlook

Regional REIT (RGL) will report its FY18 results on 28 March 2018. Several recent updates provide us with comfort that the company is on track to meet our unchanged expectations for strong total returns in FY18, and for income growth in FY19. We expect the latter to be driven by the reinvestment of disposal proceeds, occupancy and rental growth, and interest savings from the repayment of higher-cost debt.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Regional REIT

Confirming outlook

Business update

Real estate

6 March 2019

Price

101.6p

Market cap

£379m

Net debt (£m) at 31 December 2018

275.1

Net LTV at 31 December 2018

38.3%

Shares in issue

372.8m

Free float

97.1%

Code

RGL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.6)

2.7

1.8

Rel (local)

(2.2)

1.0

4.2

52-week high/low

104.0p

90.1p

Business description

Regional REIT owns a highly diversified commercial property portfolio of predominantly offices and light industrial units located in the regional centres of the UK. It is actively managed and targets a total shareholder return of at least 10% with a strong focus on income.

Next events

FY18 preliminary results

28 March 2019

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Regional REIT is a research client of Edison Investment Research Limited

Regional REIT (RGL) will report its FY18 results on 28 March 2018. Several recent updates provide us with comfort that the company is on track to meet our unchanged expectations for strong total returns in FY18, and for income growth in FY19. We expect the latter to be driven by the reinvestment of disposal proceeds, occupancy and rental growth, and interest savings from the repayment of higher-cost debt.

Year end

Net rental
income (£m)

Adjusted
EPS* (p)

EPRA NAV/
share (p)

DPS
(p)

P/EPRA
NAV (x)

Yield
(%)

12/16

38.1

7.8

106.9

7.65

0.95

7.5

12/17

45.8

8.6

105.9

7.85

0.96

7.7

12/18e

53.5

7.3

114.8

8.05

0.88

7.9

12/19e

56.0

8.6

118.3

8.25

0.86

8.1

Note: *Adjusted EPS excludes revaluation movements, gains/losses on disposal, and other non-recurring items, as well as the performance fee accrual included in EPRA EPS.

Continuing to forecast strong FY18 total return…

FY18 results will be published on 28 March 2018. Our unchanged forecasts imply a strong 16.0% full year NAV total return, including increased aggregate DPS of 8.05p per share (FY17: 7.85p), confirmed by the declaration of a Q418 DPS of 2.50p per share for payment in April. Significant disposals of mature assets at prices well ahead of valuation, and at yields well below reinvestment levels, have also driven FY18 returns, position the portfolio for further growth and demonstrate the creation of value through asset management. Although the time lag to reinvestment has a temporarily negative impact on income and DPS cover, levels, earnings and dividend cover should rebound in FY19 driven by reinvestment, occupancy and rental growth, as well as interest savings from the repayment of higher-cost debt.

…with progress towards FY19 income rebound

Since our November update several announcements have indicated progress towards our FY19 expectations. Repayment of relatively expensive debt has been completed, including the £39.9m 6.5% ZDP in January 2019, and additional facilities have provided increased funding flexibility at lower cost. With disposals running ahead of reinvestment the year-end LTV fell faster than we had expected, to 38.3%, and below the medium-term target of 40%. The end-FY18 portfolio value has been confirmed at £718.4m, a 4.5% like-for-like increase on the prior year level after adjusting for portfolio transactions and capex. RGL continues to opportunistically seek reinvestment opportunities and completed a £20m acquisition in early February at a 7.92% net initial yield. Strong letting progress towards the year end and into 2019, despite Brexit uncertainty, is also positive.

Strong returns with income focus

RGL continues to generate strong total returns and its c 8.1% prospective (FY19) yield remains one of the highest in the sector. Dividend policy is progressive and we expect DPS to be fully covered by adjusted earnings in FY19.

Details of recent announcements

Since we last published on RGL in November 2018, the group has provided several updates in respect of debt refinancing measures and the repayment of higher cost debt, significant letting activity and acquisitions. It has also confirmed dividends in line with the FY18 dividend target and, despite rising Brexit uncertainty, the end-FY18 portfolio valuation appears consistent with our NAV forecasts.

In more detail the announcements include:

Financing. In December 2018 RGL agreed a new £36m secured 10-year facility at a rate of between 3.453.60% (the final rate will be set at drawdown) and extended the existing £34.3m RBS facility for one year to 2021. The new facility should provide RGL with greater flexibility in terms of capital recycling, enabling the company to draw on debt facilities for purchases without necessarily first locking in disposals. The outstanding £13m balance of the 5% ICG Longbow facility, due to mature in August 2019, was repaid in December and £39.9m was paid to the holders of the 6.5% zero dividend preference shares (ZDPs) upon maturity in January. Following this activity, the group’s cost of borrowing including hedging costs has reduced to c 3.5% with an average remaining term (as at January 2019) of 7.2 years. The year-end LTV fell to 38.3%, below the medium-term target of 40%, and benefitting from disposals running ahead of reinvestment.

Portfolio valuation. The 31 December 2018 portfolio value was £718.4m, a 4.5% like-for-like increase on the prior year after adjusting for portfolio transactions and capex. During the year, RGL used the strength of the investment market to dispose of mature properties to a value of £152.5m (before costs), locking in aggregate gains of £23.1m on the year opening valuations, and recycling capital into £73.3m of new opportunities at higher yields.

£20m office acquisition in central Birmingham. On 4 February 2019 RGL announced the completed acquisition of Norfolk House, a c 120 sq ft freehold office property with retail units, well situated in central Birmingham, adjacent to New Street station, the Bullring shopping centre and close to the proposed new HS2 station, providing enhanced rail links to London and Manchester. The property is 98.75% occupied with an annual net income of £1.69m and the £20m consideration reflects a net initial yield of 7.92%. The main tenant for the office accommodation is HMRC, occupying 49% of the property. Despite substantial capital expenditure for refurbishment having been undertaken by the vendor, RGL believes that attractive value-enhancing asset management opportunities remain.

Substantial letting activity. Despite some market indications that executing on lease agreements may be taking longer, in part as a result of Brexit uncertainty, RGL reported a strong finish to 2018 with momentum continuing into 2019. This included securing Bristol’s largest letting in the out-of-town office market for the second quarter running.

No changes to estimates ahead of FY18 results on 28 March

The recent announcements made by RGL seem broadly consistent with our forecasts for earnings and NAV shown in Exhibit 1 and we are making no changes ahead of the full year results. Our FY18 forecast includes the expectation of c £40m of “end-year” acquisitions that have clearly been deferred into FY19, but partly realised with the Birmingham acquisition. This has a positive impact on end-FY18 debt and LTV compared with our forecasts shown in Exhibit 1.

Since IPO (and up to H118), RGL has generated an NAV total return of 32.0% or a compound average annual return of 11.0%. This is in line with the company’s target of generating a total shareholder return of at least 10% pa and makes no adjustment for IPO costs. Our forecasts indicate further progress in H218.

The FY19 prospective yield of 8.1% continues to position RGL at the very high end of the broad UK property sector, and we forecast that the FY19 DPS will increase and be fully covered by adjusted earnings. Meanwhile, the shares trade at a c 12% discount to our forecast end-FY18 EPRA NAV per share.

Exhibit 1: Financial summary

Year end 31 December (£000's)

2015

2016

2017

2018e

2019e

PROFIT & LOSS

IFRS

IFRS

IFRS

IFRS

IFRS

Gross rental income

5,361

42,994

52,349

60,683

63,242

Non-recoverable property costs

(754)

(4,866)

(6,502)

(7,197)

(7,278)

Revenue

 

 

4,608

38,128

45,847

53,487

55,964

Administrative expenses (excluding performance fees)

(1,353)

(7,968)

(7,819)

(10,260)

(10,549)

Performance fees

0

(249)

(1,610)

(5,238)

(1,318)

EBITDA

 

 

3,255

29,911

36,418

37,989

44,097

EPRA cost ratio

n.m

29.6%

29.7%

36.8%

29.6%

EPRA cost ratio excluding performance fee

n.m

29.0%

26.6%

28.1%

27.5%

Gain on disposal of investment properties

87

518

1,234

16,404

0

Change in fair value of investment properties

23,784

(6,751)

5,893

26,065

11,420

Operating profit before financing costs

 

 

27,126

23,678

43,545

80,457

55,517

Exceptional items

(5,296)

0

0

0

0

Net finance expense

(820)

(8,629)

(14,513)

(15,756)

(13,061)

Net movement in the fair value of derivative financial investments and impairment of goodwill

115

(1,654)

(340)

39

0

Profit Before Tax

 

 

21,124

13,395

28,692

64,741

42,456

Tax

0

23

(1,632)

(355)

0

Profit After Tax (FRS 3)

 

 

21,124

13,418

27,060

64,386

42,456

Adjusted for the following:

Net gain/(loss) on revaluation/disposal of investment properties

(23,870)

6,233

(7,127)

(42,469)

(11,420)

Net movement in the fair value of derivative financial investments

(180)

865

(407)

(362)

0

Other EPRA adjustments including deferred tax adjustment

0

557

4,488

473

0

EPRA earnings

 

 

(-2,926)

21,073

24,014

22,028

31,036

Performance fees & exceptional items

5,296

249

1,610

5,238

1,318

Adjusted earnings

 

 

2,371

21,322

25,624

27,266

32,354

Period end number of shares (m)

274.2

274.2

372.8

372.8

376.4

Fully diluted average number of shares outstanding (m)

274.2

274.3

297.7

375.5

377.3

IFRS EPS - fully diluted (p)

 

 

7.7

4.9

9.7

17.4

11.3

Adjusted EPS, fully diluted (p)

 

 

0.9

7.8

8.6

7.3

8.6

EPRA EPS, fully diluted (p)

 

 

(1.1)

7.7

8.1

5.9

8.2

Dividend per share, declared basis (p)

 

 

1.00

7.65

7.85

8.05

8.25

Dividend cover

n.a.

102%

110%

90%

104%

BALANCE SHEET

Non-current assets

 

 

407,492

506,401

740,928

759,364

778,784

Investment properties

403,703

502,425

737,330

756,478

775,898

Other non-current assets

3,790

3,976

3,598

2,886

2,886

Current Assets

 

 

35,803

27,574

66,587

115,264

69,081

Other current assets

11,848

11,375

21,947

21,040

19,105

Cash and equivalents

23,954

16,199

44,640

94,224

49,976

Current Liabilities

 

 

(21,485)

(23,285)

(42,644)

(95,493)

(52,486)

Bank and loan borrowings - current

(200)

0

(400)

(39,795)

0

Other current liabilities

(21,285)

(23,285)

(42,244)

(55,698)

(52,486)

Non-current liabilities

 

 

(126,469)

(218,955)

(371,972)

(349,600)

(350,600)

Bank and loan borrowings - non-current

(126,469)

(217,442)

(371,220)

(349,166)

(350,166)

Other non-current liabilities

0

(1,513)

(752)

(434)

(434)

Net Assets

 

 

295,341

291,735

392,899

429,536

444,779

Derivative interest rate swaps & deferred tax liability

416

1,513

2,802

2,678

2,678

EPRA net assets

 

 

295,757

293,248

395,701

432,214

447,457

IFRS NAV per share (p)

107.7

106.4

105.4

115.2

118.2

Fully diluted EPRA NAV per share (p)

107.8

106.9

105.9

114.8

118.3

CASH FLOW

Cash (used in)/generated from operations

 

 

(2,232)

31,434

40,251

49,709

42,820

Net finance expense

(424)

(6,626)

(9,167)

(12,071)

(12,061)

Tax paid

0

(1,715)

(236)

(131)

0

Net cash flow from operations

 

 

(2,656)

23,093

30,848

37,507

30,759

Net investment in investment properties

1,157

(99,286)

(8,267)

26,710

(8,000)

Acquisition of subsidiaries, net of cash acquired

26,659

(5,573)

(51,866)

(2,332)

0

Other investing activity

13

60

25

59

0

Net cash flow from investing activities

 

 

27,828

(104,799)

(60,108)

24,437

(8,000)

Equity dividends paid

0

(15,723)

(23,321)

(23,034)

(30,774)

Debt drawn/(repaid) - inc bonds and ZDP

(1,217)

91,417

13,921

12,327

0

Other financing activity

0

(1,744)

67,101

(1,653)

(36,233)

Net cash flow from financing activity

 

 

(1,217)

73,950

57,701

(12,360)

(67,007)

Net Cash Flow

 

 

23,955

(7,756)

28,441

49,584

(44,248)

Opening cash

0

23,955

16,199

44,640

94,224

Closing cash

 

 

23,955

16,199

44,640

94,224

49,976

Balance sheet debt

(126,669)

(217,442)

(371,620)

(388,961)

(350,166)

Unamortised debt costs

(1,875)

(2,618)

(4,693)

(4,195)

(3,195)

Closing net debt

 

 

(104,588)

(203,861)

(331,673)

(298,932)

(303,385)

LTV

25.9%

40.6%

45.0%

39.5%

39.1%

Source: Company data, Edison Investment Research

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This report has been commissioned by Regional REIT and prepared and issued by Edison, in consideration of a fee payable by Regional REIT. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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General disclaimer and copyright

This report has been commissioned by Regional REIT and prepared and issued by Edison, in consideration of a fee payable by Regional REIT. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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ASIT biotech — Supportive data on ASIT’s short-course therapy

ASIT has announced the publication of mode of action data from its first Phase III study for its gp-ASIT+ product for grass pollen allergies. This is supportive of ASIT’s short-course adjuvant-free approach to allergy vaccination. The study demonstrated both immunological and symptomatic responses that persisted until the end of the pollen season.

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